Financial Services Regulation and Compliance - Investment Firms Apr 2022
Financial Services Regulation and Compliance - Investment Firms Apr 2022
CBI publishes "Dear CEO" Letter addressed to MiFID authorised firms offering Structured Retail Products
On 22 April 2022, the CBI published a "Dear CEO" letter addressed to MiFID authorised firms offering structured retail products. The letter details the CBI's findings from a series of targeted reviews of structured retail products (SRPs) manufactured and distributed by a sample of investment firms in the MiFID investment sector. The letter identified a number of poor practices and weaknesses in firms' processes. It also identified further actions required by firms including the following:
The target market assessment to be conducted in a proportionate manner, considering the nature and complexity of the product.
Where complex features are proposed, firms must consider if they are appropriate for the retail market and whether they are likely to be understood by the target market. The approval of the use of such features should be subject to robust governance and challenge to ensure they are justified and in clients' best interests and this should be clearly documented.
Where past performance (back-testing) information is presented, it must be fair and balanced, supported by clear narrative and context, and must not diminish the potential likelihood of capital loss. Care must be taken to avoid presenting an overly-optimistic or unbalanced picture of the likely investor outcomes.
Capital at risk warnings must be in a prominent location in all marketing communications and advertisements.
Take special care when designing and presenting marketing information to ensure that individual statements, as well as the tone and overall content when read together, remains clear, fair and not misleading. In particular, care must be taken to avoid presenting an overly-optimistic or unbalanced picture of the likely investor outcomes.
Pre-sale disclosure of the risk that a product may be restructured.
ESMA publishes MAR Guidelines on delay in the disclosure of inside information and interactions with prudential supervision
On 13 April 2022, the European Securities and Markets Authority (ESMA) published Markets Abuse Regulation (MAR) guidelines on delay in the disclosure of inside information and interactions with prudential supervision. The guidelines cover the following areas:
legitimate interests of the issuer for delaying disclosure of inside information
situations where delay of disclosure of inside information is likely to mislead the public
Pillar 2 capital requirements and inside information
Pillar 2 capital guidance and inside information
The guidelines are applicable from 13 June 2022.
ESMA letter to the EC on the MiFID II suitability consultation
On 13 April 2022, ESMA published its letter in response to the European Commission consultation on options to enhance the MiFID II suitability and appropriateness assessments. ESMA made observations on some elements of the Commission proposals, including on the following:
the proposal to apply a unique and standardised retail investor assessment regime that no longer differentiates among the various investment services
the significant impact the proposals will have on the current model for the provision of services
GDPR implications of the proposals
the proposal to align requirements for the distribution of investments products that currently fall within MiFID and IDD
the lack of mention of knowledge and experience among the information to be collected from clients in Commission's consultation
ESMA publishes guidelines on certain aspects of the MiFID II appropriateness and execution-only requirements
On 12 April 2022, ESMA published guidelines on certain aspects of the MiFID II appropriateness and execution-only requirements. The guidelines cover the following areas:
information to clients about the purpose of the appropriateness assessment and about execution-only
know your client and know your product
matching clients with appropriate products
qualifications of firm staff
determining situations where the appropriateness assessment is required
monitoring arrangements and controls to ensure compliance with appropriateness requirements
The guidelines are applicable from 12 October 2022.
ESMA: ESG funds provided better returns for investors in 2020
On 5 April 2022, ESMA published its fourth annual statistical report on the cost and performance of EU retail investment products. A new finding this year is that UCITS with an environmental, social and governance (ESG) strategy (including equity, bond and mixed funds) outperformed their non-ESG peers, and were also cheaper overall.
The report examined the market over the 10 year period ending in 2020. Some of the main findings in the report are:
Gross performance: gross performance in 2020 was low or negative and highly volatile due to the COVID-19 pandemic.
Costs: total costs were higher for retail investors than for institutional investors, on average. Costs for cross-border funds were higher than those for domestic funds.
ESG UCITS: ESG equity, bond and mixed funds were overall cheaper than non-ESG peers, while their performance reflected the strong performance of specific sectors since the COVID-19 crisis. Within the ESG fund category, impact funds performed better than other ESG strategies and funds with sustainable investment as the objective performed better in net terms, after having included costs, than those promoting environmental or social characteristics despite slightly higher costs.
Retail AIFs: in 2020, retail investors accounted for only 13% of the total net asset value in the EU AIF market.
Structured retail products: total costs were largely attributable to entry costs and varied substantially by country and by pay-off type, but they did not depend on issuance size or underlying type.
ESMA responds to European Commission consultation on EMIR Review
On 5 April 2022, ESMA published its response to the European Commission (EC) consultation on a targeted review of EMIR with respect to the EU central clearing framework. ESMA recommends a set of measures for consideration that will increase the attractiveness of EU markets and reduce exposure to central counterparty clearing houses located outside the EU. The recommendations include proposals to:
increase the attractiveness of cleared EU markets, e.g. by expanding and facilitating entities clearing in the EU
improve the clearing obligation framework, e.g. by changing the reference from OTC to non-cleared derivatives in the clearing thresholds
incentivise EU clearing participants to reduce their exposures to UK CCPs
enhance the EU supervisory framework for CCPs
mitigate risks remaining at UK CCPs
The EC, based on the feedback received from stakeholders to its public consultation, will develop a legislative proposal amending the EU central clearing framework.
ESMA published its final report on the review of the short selling regulation
On 4 April 2022, ESMA published its final report on the review of the Short Selling Regulation (SSR). The report proposes targeted amendments to improve its operation, focused on clarifying the procedures for the issuance of short and long-term bans, ESMA’s intervention powers, the prohibition of naked short selling and the calculation of net short positions (NSPs) and their publication.
The report focuses on three main areas:
Empirical analysis of the impacts of the emergency measures adopted during the COVID-19 crisis. ESMA proposes amendments to the rules for relevant competent authorities (RCAs) to issue long-term and short-term bans and for ESMA to adopt intervention powers. The amendments aim at ensuring that the relevant procedures are clear, streamlined and sufficiently flexible for RCAs and ESMA to effectively tackle emergency situations.
Review of the current framework for the calculation of NSPs, the list of exempted shares and the so- called locate rule to be met when short selling. In respect of the latter, it is proposed to enhance the existing rules about uncovered short sales by introducing record keeping requirements and a degree of harmonisation of sanctions.
Assessment of the framework for transparency and publication of NSPs, also considering the recent market events. ESMA proposes the introduction of an ESMA centralised system for publication and disclosure to the public of NSPs and an EU-wide obligation for RCAs to periodically publish aggregated NSPs per issuer, integrating all individual positions reaching or exceeding the notification and the publication thresholds.
The report has been submitted by ESMA to the European Commission.
Sanctions imposed in response to the crisis in the Ukraine
Since February, the EU imposed a number of sanctions in response to the crisis in the Ukraine. Given that the crisis is developing and sanctions are continuing to evolve, the CBI is publishing details of new restrictive measures/sanctions that are adopted in this regard, as well as any associated EU/UN guidance, on their dedicated webpage.